Discounting is anathema to most small business owners and
managers, as I'm sure it does to you. You
know that while discounting can increase sales, it does so at the expense of
profitability. Any reduction in price
reduces your overall margin, your gross profit and hence straight off you're
the bottom line, your net profit.

A simple example
demonstrates the impact on profitability.
These figures are entirely hypothetical, but they illustrate the
principal.

Suppose you operated a fast food cart in a shopping
mall. What you are selling could be
hamburgers, meat pies or whatever is popular in your locality. Site rental costs you $1,000 per week and
labour $500. Your solitary item for
sale, be it pie or hamburger whatever costs you $1.85 to make and sells for
$3.85, giving you a gross profit of $2.00 per item. Yes, I know this is simple but bear with me.

So to breakeven, that is to sell just enough to cover all
costs before you start making a profit, you have to sell 750 items, a simple
calculation of dividing your fixed costs (site rent and wages) by your gross
profit of $2.00.

Let's look at two
scenarios in our simple example when some things change.

Firstly, an increased cost scenario
- both site rental and wages increase by 15% to a total of $1,725. To breakeven you have to sell, naturally
15% more items. That sounds pretty
straight forward.

Alternatively, you bravely decide to
discount your price by 15% to increase sales. There has been no increase in costs. Do the maths. To breakeven now at the reduced price of
$3.27 per item you have to sell, wait for it, .........40% more items. That is a very large increase in sales. Can you do it. And to make a reasonable profit you will
have to sell even more. Can you do
it?

So can there ever be
a good time to discount?

Well, yes, in certain circumstances.

If you can lower your
cost of sales so that there is no change in your margin then, with your
gross profit protected, your nett profit will be unchanged. Effectively you are competing on costs not
price.

In another situation,
if your goods are slow moving and have a ‘use by date' or short shelf life,
discounting can help. For example with
our simple food cart you can't sell today's food tomorrow, so discounting at
the end of the day may help to recover at least the cost of the item, your variable
costs, with maybe a small contribution to your fixed costs of rent and
wages. Another example would be fashion
items at the end of the season, or model run-out for vehicles.

But discounting
generally ? Only if you are not in the
business of making profits. It's
anathema.

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